Ryan Falvey

Financial Solutions Lab bridging the gap between expenses and income

A new snapshot report from Financial Solutions Lab summarizing trends among their 298 applicants reveals information prospective and actual alt-fi players would be wise to consider.

The Financial Solutions Lab is a five-year program managed by the Center for Financial Services Innovation with a $30-million grant from JP Morgan Chase. Its goal is to identify, test and bring to scale-promising innovations to help Americans increase savings, improve credit and build assets.

Financial Solutions Lab's Ryan Falvey
Financial Solutions Lab’s Ryan Falvey

Financial Solutions Lab Director Ryan Falvey said they focus on solutions to problems which affect the financial health of many Americans. One is the mismatch between income and expenses.

While paychecks and bills come at regular intervals, those two are not often optimally synchronized. This leaves many people maintaining a delicate balance between paying those bills and covering groceries, energy costs and other basic needs.

Should an unplanned expense such as a car or house repair arise, Mr. Falvey said more than half of Americans would have to borrow to cover a tab in excess of $400.

Some of those people will be lucky to tap into their family or social circle, but with a 50 percent chance the person they tap may be thinking of tapping them, it sends many to high-cost lenders.

The most frustrating aspect of this is that the money will soon be there on payday, not just soon enough for the bill holder. Take the high-cost option, and by the time you pay that off, you are further behind and even more vulnerable to the next “surprise.”

In February Financial Solutions Lab launched its first competition, challenging companies to provide innovative solutions leveraging technology to reduce the cost, time, and stress Americans face as they manage their household cash flows.

The business community responded, Mr. Falvey said, to the tune of 298 companies from 38 different states.

Their solutions were expected to fall in one of five product types:

  • Planning – personal financial management tools, budgeting solutions, account aggregation and visualization services, and financial education solutions;
  • Credit – personal loans or income advances;
  • Payments – products that relate to transferring funds;
  • Savings – methods for reserving or accumulating money;
  • Investing – asset-related products (e.g. securities, retirement savings).

Two-thirds of the solutions could not cleanly fit into one of those categories, Mr. Falvey said.

“The majority were hybrid solutions combining two or more of the categories.”

That reflected an overall level of sophistication and planning that, in retrospect, should not be surprising, Mr. Falvey added. Those five areas are deeply interrelated, so solutions originally designed to address one area have implications for others.

One company addressing multiple area is EVEN. Mr Falvey said EVEN helps hourly workers smooth out their regular income so they can successfully manage their regular bills. The number of hourly and 1099 workers are growing, and because these people do not have predictable income levels, they are prone to financial shock from a leaner work period. EVEN takes money from the better periods and saves it for the weaker ones.

The EVENS of the world are on to something, and both consumers and investors know it, Mr. Falvey said. Companies with hybrid products have 16 times the number of customers and capital raises 600 percent larger than singular ones.

Financial Solutions LabRecognizing the interconnected nature of financial management is but one indicator of the advanced development of the average Financial Solutions Lab applicant, Mr. Falvey said. Another is their success as reflected in the numbers.

The 298 companies were already serving 10 million Americans. They employed 2,000 people and had collectively raised $175 million between them (average $587,000).

Because many of these companies had seen successful raises, they were most interested in partnership opportunities which could grow their business, Mr. Falvey said. Such partnerships could include strategic advice and access to new revenue streams.

The companies also recognized the importance of clearly defining their social impact. Close to half (48 percent) of them were measuring their consumer impact prior to their Financial Solutions Lab application.

These companies operate across the country. While the Bay Area at 20 percent and New York City at 18 percent are the two most popular locations, there are other activity pockets like Washington, D.C., Mr. Falvey said.

The benefit of being near Silicon Valley is seen in a company’s ability to raise capital. The average Bay Area outfit raised 71 percent more capital than one located elsewhere. Of the 29 applicants who raised at least $2 million, 40 percent were from that area. That gulf is even larger at the pre-product stage as the average Bay Area pre-product applicant had raised more than double the amount of one located outside the region.

Mr. Falvey said four final observations were apparent. The first is the trend of products being more focused on personal financial health than simple financial management. While a few companies offered solutions solely focused on planning, understanding and managing finances, nearly three times as many took a more holistic approach by incorporating the planning tool into a solution providing additional proactive benefits.

The notion of credit is changing, Mr. Falvey added. A growing number of companies in many sectors are developing credit products beyond the normal interest-based revenue model.

While blockchain and cryptocurrencies have captured the imagination of the industry, that has yet to translate to actual products. Only eight applicants had solutions incorporating these elements, with most focusing on cross-border payments.

Mr. Falvey said a growing number of companies are attempting to help their clients by reaching the money at the source – the employer. While this makes sense from a functional perspective it raises several challenges.

The most common is convincing employers to adopt a new tool which brings them no tangible benefit. Some may question adding another responsibility to their busy payroll department.

Then the employer will have to sell this service internally to their employees. Many employers are not used to selling services to their own staff. Should a company have many contract personnel or consultants, they may be wary of offering them services which could be interpreted as a benefit, Mr. Falvey said.

“Introducing a new product is not easy,” Mr. Falvey said. “You have to be able to find the right person in the organization to discuss this with.”

“Some companies take innovative approaches to get passed those barriers.”

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